Market News & Insights
6 March 2014

BOE/ECB: Interesting Decisions

EUR/USD            1.3729
GBP/USD            1.6715
GBP/EUR            1.2173 (0.8213)
EUR/CHF             1.2194
GBP/CHF             1.4844
GBP/AUD            1.8483

In the build up to today’s BOE meeting, sterling put in another strong showing yesterday appreciating against its peers for much of the European trading day. However, the run of strong data this week wasn’t sufficient enough for the pound to test new highs versus the likes of the euro and US Dollar. As we have continuously highlighted, much good news is already priced in for sterling, so whilst the various PMI figures were positive and ahead of expectations in most cases, they weren’t sufficient enough to push through .82 on EURGBP or 1.6740 versus the US Dollar. As a result were are off these highs this morning.

So what was the data and will it impact the BOE decision makers. On Monday, UK Manufacturing came in stronger than the 56.8 consensus at 56.9 for the month of February. Tuesday, the Construction reading slightly missed expectations of 63.2 but still came in at a remarkably strong reading of 62.6. Most important of all was yesterday’s Services reading which accounts for over 70% of the UK economy, exceeded expectations for the month of February at 58.2. The latter being the catalyst for the mini sterling rally. Despite all this, the week so far is likely to have little or no influence on today’s BOE MPC meeting. A day on from the fifth anniversary of having cut the Bank Rate to 0.5%, the BOE is unlikely to change tack, keeping rates and the asset purchase target unchanged in what is likely to be a unanimous voting decision. This non event then, is likely to focus attention of the proceeding ECB announcement and subsequent press conference.

Today we also have the ECB rate decision, with Draghi’s usual press conference due afterwards. While Draghi acknowledges the Eurozone is facing a “weak, fragile and uneven recovery” the majority of economists are expecting the ECB to hold off on cutting interest rates further for now.  As mentioned in Draghi’s previous speech, the ECB were still waiting to see the effects of the previous rate cuts filter through. The cut back in Nov 13 appears to be filtering through of late with Eurozone CPI higher and better than expected readings in PMI data throughout the Eurozone, may ease pressures for a rate hike.

However whilst marginally higher, inflation currently sits in the ECB’s “danger zone” below 1% at 0.8% percent at last count, one may argue that not enough is being done to reach the 2% target. Draghi has surprised us in the past before, and the question he faces is, are the headline figures rising fast enough?

Yesterday saw several points of US economic data released, first up was ADP Employment report coming out 139k versus 159k expected. This missed estimates to the downside and followed a large downwardly revised 127k  in January, far weaker than initially reported, the weakest two months since August 2012. Harsher winter conditions have been attributed to companies not hiring. Next up was ISM Non-Manufacturing PMI coming out at 51.6 versus 53.8 expected, 2.4 points lower than January’s reading of 54 percent. Non-Manufacturing Business activity Index decreased to 54.6, which is 1.7 points lower than the reading of 56.3 reported in January, reflecting growth for the 55th consecutive month albeit at a slower rate